What Is The 'Bucket Strategy' And How Can It Affect Your Retirement Plans?

The bucket strategy is one option retirees (and those saving for a future retirement date) can leverage to help them manage their long-term cash flow and retirement asset equity. No strategy will be a one-size-fits-all solution that every investor should jump on, but the bucket strategy follows many of the key investing principles that underpin generally good stewardship of assets, making it a solid approach for plenty of savers. Rather than investing in assets like annuities (something that Warren Buffett might advise against given the high cost of these investment vehicles), the bucket strategy helps create long-lasting retirement income without explicitly exposing you to heightened tax burdens or high-cost assets that erode your overall equity. The strategy also seeks to limit your exposure to selling demands (more on that later, though).

The bucket strategy separates out your short-, medium-, and long-term financial goals, creating a varied approach to retirement investing designed to support needs across these differing timelines. As a conceptual framework, it's an excellent option for investing in assets that aim to see you through your entire retirement. However, there are some limitations and potential pitfalls to keep in mind.

Generally speaking, those who subscribe to this way of thinking will divide their attention into either two or three buckets, corresponding to short term and long term, or adding a medium time frame into the mix, as well. "Bucketers" will focus on different kinds of assets for each of their buckets, creating liquid capital options in the first bucket and investing in increasingly illiquid, growth-focused options in the others. Separating out investments like this gives you smaller, bite-sized goals to focus on, too, potentially helping you save more confidently for your future.

In your first bucket, you might prioritize things like liquid high-yield savings accounts (these are most often found in online-only banks), CDs, or certain stock assets. The capital here should reach a volume that's capable of funding your lifestyle for one or more years, completely (perhaps as many as three to five years). However, part of your liquid assets are things like Social Security checks, pension distributions, and other stable retirement income sources not tied specifically to your long-term investment strategy.

Beyond this first reservoir of liquid capital, you'll have more stable growth or dividend-producing assets. Some savers might break this up into two or more buckets while others might simplify their strategy with just a single distinction between short-term capital and longer-term assets. (Read about actions you can take to bridge an early-retirement income gap.)

The primary purpose of mentally, and perhaps even logistically, separating assets into different categories like this is to protect your long-term growth equity stake. Every investor approaching retirement will have to reckon with this difficult relationship between distributing retirement cash and preserving their portfolio's long-term value. Draw down on your assets too quickly and you'll run out of money, but act too frugally and you might live a pauper lifestyle and ultimately die with tons of capital left invested (initiating the need to utilize an inherited IRA or similar transitional vehicle).

Providing breathing room for your most valuable growth assets helps spare them from a potential future in which you'll need to sell them early in retirement. Selling shares delivers liquid cash assets, but so too does creating a stream of retirement income through dividend producers, assets like real estate, and even passive-income generators. Separating your assets into buckets preserves the ownership stake you have in the underlying investments that provide the most growth value. By protecting them, your equity value maintains the ability to continue growing, even as you start taking distributions from other buckets. This can lengthen your retirement funding even more.

The bucket strategy also focuses on intelligent tax-burden management. Reducing your taxes through targeted income figure manipulation isn't really a feature of most workplace environments, but it's baked into the experience of retirement. As you begin to draw down your 401(k), traditional IRA, and other tax-assessed retirement assets, you can make withdrawals that are as large or small as you like.

For instance, in 2025, the 12% tax bracket for married joint filers will have a ceiling at $96,950. You might need $80,000 annually to fund the lifestyle you want to live, but plan to pay for a large wedding next year. Drawing out additional funding this year to reach the upper limit of that tax bracket in advance of the overage's use next year will give you wiggle room to withdraw more money next year without fear of boiling over and having a portion of your retirement income classed in the 22% tax bracket.

This is sometimes known as "filling your buckets." Even though you don't need the extra cash this year, when you do need it, the money will already have been taxed, and at a lower rate than you'd have been on the hook for by waiting. In the larger scheme of things, you might opt to move some of your second-bucket capital into the first bucket ahead of a move like this, or draw out additional funding from the first bucket and tap into the long-term assets just a bit sooner than planned, later on. (See if the new 2025 income tax brackets and standard deductions will affect you.)

This brings us to the primary pitfall of the bucket strategy. There are so many factors at play in developing a solid approach to retirement saving that no coherent indicators exist to help you decide with absolute certainty when to rely on one bucket versus another. Rebalancing and the process of selling off assets is entirely dependent on your own instinct and feel for the market. Some users will want to use up the entirety of the assets found in their first bucket before augmenting things like their Social Security check with sales of their long-hold growth assets. Others will seek to continually replenish their first bucket to use as a sort of emergency fund to stave off selling assets when the market is going through a correction or even bear-trading periods.

Maintaining some level of capital in your liquid bucket is thought of as a good idea, but how much and how often you should transition funds into this asset arrangement isn't going to be the same for everyone, and even a single retiree will see their strategy shift with the market itself over time. Therefore, this strategy should be used in conjunction with guidance from a financial professional, or utilized by a saver who is acquainted with the ins and outs of the market and has confidence in their own investment capabilities.